Why The Bank Bailouts Are Doomed

[Purveyor]

It's tempting to believe that more money will fix the messes of our financial institutions. But simple math tells us the system is insolvent, and the solutions are unpalatable.

By Jon Markman
MSN Money

In the past 12 months, taxpayers, sovereign wealth funds and private investors have sunk $1 trillion into failing U.S. and British financial institutions, while central banks have slashed their cost of funds to nothing and their collateral standards even lower. Yet major banks continue to collapse. Why?

It's tempting to suggest that fixes so far were too late, too small and too clumsily applied. Yet new evidence suggests a much more uncomfortable answer: Perhaps the hole at the bottom of bank vaults is simply too big to fill even by governments that can mass-produce money with the press of a button. And therefore the only cure may be the most precious commodity of all, and that is time.

The math is not complicated. Bank losses from the write-offs of bad loans and busted derivatives tally up to $1.5 trillion so far. In addition, $5 trillion to $10 trillion worth of off-balance-sheet businesses such as structured investment vehicles -- leveraged lending vehicles used by big banks to fatten their profits in boom times -- are being forced back to banks' balance sheets by regulators. Rules require banks to keep a base of real shareholder capital amounting to 10% of those funds. So banks need to find up to $1 trillion within the next year to meet that objective.

Add the $1.5 trillion in losses to $1 trillion in needed new reserves, and you can see that banks need as much as $2.5 trillion in new capital to remain solvent under current rules. I know that we throw around words like "trillion" like they're nothing, but that is a lot of money. Consider that the entire world banking system had only $2 trillion in shareholder capital in 2007, before everything blew up.

Banking's leaky bucket

In aggregate, therefore, the entire system is simply insolvent, as liabilities are greater than assets. Governments aren't forcing banks to admit this, but investors are, and that is why big banks' shares have lost half of their value this year. Governments, meanwhile, are trying desperately to help banks plug the gap, but they're coming up short. When you add the $500 billion from sovereign wealth funds to the $500 billion from the first tranche of the Troubled Assets Relief Program, it's only $1 trillion. That's already been provided. So that leaves a gap of $500 billion to $1.5 trillion.

MORE...

MSN Money: http://articles.moneycentral.msn.com/Investing/SuperModels/why-the-bank-bailouts-are-doomed.aspx?page=all

[msongs]

1. start by slashing upper management that got them into the mess....

unfortunately, the rules of business do not apply to banks. they do the opposite of what one should do - if you want more depositors, RAISE your interest rates to attract money, not cut them. doh!

cutting at the top is where the savings accrue fastest. It's not the bank tellers' faults that management is incompetent and/or criminal.

this should apply to all corporations, start cutting at the head first.

and all corporations that offshore jobs should lose any benefits gained as being a US business. Corporations that offshore their HQ's and money should also lose all benefits gained as being a US business. Act like a foreign corporation, be treated like one.

Msongs

[mdavies013]

2. It's not all a bank problem...it is a demand problem...no one has the money to spend

WE have been spending too much....all of us. NO one has the money to spend right now. We have had to cut to the bone to make it. But record profits for the oil companies again.

[ConcernedCanuk]

3. It will take a generation of people living WITHIN THEIR MEANS to make money markets stable

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Buddy gets a new job with high pay

O% down and 700 bucks a month lets him drive away with a $50,000 vehicle

1,000 down and 1400 bucks a month gets him a 300,000 house

OOPS

Job gone

Vehicle repossessed

Home foreclosed on . . .

and on and on

I cut my credit cards up in 1981

never borrowed a penny from a bank since

Bought my present vehicle for $3,000 cash 19 years ago

If it breaks, I park it until I can afford to fix it.

With money saved, not borrowed.

I keep a few months food on hand, so when things get tight, my diet doesn't suffer

I've been in "rich" people's houses that didn't have 20 bucks worth of food in it!

Or not enough cash around to pay the paperboy!

Priorities . . .

hmmmm . . . :freak:

[tonycinla]

6. Good!

I like the way you think.

[depakid]

4. Time for another RTC

Actually, that time has long since past.

[AwakeAtLast]

5. Are there any banks that are safe?

What is the average American supposed to do?

My great-grandmother kept coffee cans - a basement full. I'm wondering if I need to start where she left off. x(

[ConcernedCanuk]

7. AwakeAtLast - live up to your nic . - great gramma wasn't stupid, she was a survivor - -

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Just my humble Canuk opinion

[AwakeAtLast]

8. Oh I know she was a survivor

She lived until the ripe old age of 95 still living in her own home. I'm just angry that all of the hard work of my ancestors to make my life and the lives of my family better got them nowhere. We are back at square one, or will be very soon.

I know I'm not the only one in that boat. Our families worked so hard for what? To line the pockets of some corporate fat cat?

This is where the pitchforks come in, I'm afraid.

[ConcernedCanuk]

9. I for one, would stand beside you with another pitchfork!

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And poke a corporate fat cat or two!

I'll digress a bit

The hard work of your ancestors, and mine didn't "get us nowhere"

Just didn't progress as smoothly as we hoped . .

or deserved . .

BUT

In the memory of parents lost - (just realized, Your mother died at the same age as my Father, 95 he was - ya think they are fooling around up/down there?)

We will carry on - pitchforks sound like a good idea - -

AND

will WE still be around at the same age as our parents?

OMG

another 37 years!

[AwakeAtLast]

10. I hope I kept her pitchfork

Otherwise I'll have to buy one made in China ;)

[ConcernedCanuk]

11. LOL

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